Taxable fringe benefit guide

Internal Revenue Service

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Taxable Fringe Benefit Guide

FEDERAL, STATE, AND LOCAL GOVERNMENTS THE INTERNAL REVENUE SERVICE

January 2010

1 Introduction

2 Reporting Fringe Benefits

3 Working Condition Fringe Benefits

4 De Minimis Fringe Benefit

5 No-Additional-Cost Fringe Benefits

6 Qualified Employee Discount

7 Qualified Transportation Fringe Benefits (QTF)

8 Health and Medical Benefits

9 Travel and Transportation Expenses

10 Moving Expenses

11 Meals and Lodging

12 Use of Employee-Owned Vehicle

13 Employer-Provided Vehicle

14 Independent Contractors

15 Equipment and Allowances

16 Other Types of Compensation

17 Awards and Prizes

18 Professional Licenses and Dues

19 Volunteers

20 Educational Reimbursements and Allowances

Appendix: Charitable Contributions to Governments

Appendix: Contact Information

INDEX



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1 Introduction

The Taxable Fringe Benefits Guide was created by the Internal Revenue Service office of Federal, State and Local Governments (FSLG) to provide governmental entities with a basic understanding of the Federal tax rules relating to employee fringe benefits and reporting.

Used as a supplement to other IRS publications, the Fringe Benefit Guide can be a helpful tool for anyone responsible for determining the taxability, withholding, and reporting requirements regarding employee fringe benefits.

This publication covers:

•tax treatment, reporting and withholding of common employer-providedThe fringe benefits.

•procedures for computing the taxable value of fringe benefits.General

•Reporting the taxable value of benefits on Forms W-2 and 1099-MISC.

•Additional Federal reporting requirements that are in effect for certain fringe benefits.

•Procedures for obtaining answers from the Internal Revenue Service to questions regarding taxation and reporting requirements.

NOTICE

This guide is intended to provide basic information on the subjects covered. It reflects the interpretation by the IRS of tax laws, regulations, and court decisions. The explanations in the guide are intended for general guidance only, and are not intended to provide a specific legal determination with respect to a particular set of circumstances. Additional research may be required before a determination may be made on a particular issue. Citations to legal authority are included in the text. You may contact the IRS for additional information. You may also want to consult a tax advisor to address your situation.



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What Is a Fringe Benefit?

A fringe benefit is a form of pay (including property, services, cash or cash equivalent) in addition to stated play for the performance of services. Some forms of additional compensation are specifically designated as “fringe benefits” in theInternal Revenue Code; others, such as moving expenses or awards, have statutory provisions providing for special tax treatment but are not so designated by the Code. This publication uses the term broadly to refer to all remuneration other than stated pay for which special tax treatment is available. The definition of fringe benefits applies to services of employees and independent contractors; however, unless otherwise indicated, this guide applies to fringe benefits provided by an employer to an employee. (For a discussion of whether a worker is an employee or independent contractor, seePublication 15-A.) Fringe benefits for employees are taxable wages unless specifically excluded by a section of the Internal Revenue Code (IRC). IRC §61 IRC §3121, 3401; IRC §61(a)(1)

The IRC may provide that fringe benefits are nontaxable, partially taxable, or tax-deferred. These terms are defined below.

Taxableexcluded under an IRC section. If the recipient is– Includible in gross income unless an employee, this amount is includible as wages. For example, bonuses are always taxable because no IRC section excludes them from taxation.

Nontaxable (excludable)– Excluded from wages by a specific IRC section; for example, qualified health plan benefits excludable under section 105.

Partially taxable- Part is excluded by IRC section and part is taxable. Benefits may be excludable up to dollar limits, such as the public transportation subsidy under IRC §132.

Tax-deferred– Benefit is not taxable when received, butsubject to tax later. For example, employer contributions to an employee's pension plan may not be taxable when made, but may be taxed when distributed to the employee .IRC § 402(a)

More than one IRC section may apply to the same benefit. For example, education expenses up to $5,250 may be excluded from tax under IRC §127. Amounts exceeding $5,250 may be excluded from tax under IRC §132.

A benefit provided on behalf of an employee is taxable to an employee even if the benefit is received by someone other than the employee, such as a spouse or a child. Reg. § 1.61-21(a)(4)

“Taxable” means the benefitis included in the employees' wages and reported on Form W-2, Wage and Tax Statement, and generally is subject to Federal income tax withholding, social security (unless the employee has already reached the current year wage base limit), and Medicare. An employer’s matching contribution is required for social security and Medicare.

If an employee's wages are not normally subject to social security or Medicare taxes (for example, because the employee is covered by a qualifying public retirement system), any taxable fringe benefits would also not be subject to social security or Medicare taxes.



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General Valuation Rule

Generally, taxable fringe benefits are valued at their fair market value (FMV). FMV is the amount a willing buyer would pay an unrelated willing seller, neither one forced to conduct the transaction and both having reasonable knowledge of the facts. In many cases, the cost and FMV are the same; however, there are many situations in which FMV and cost differ, such as when the employer incurs a cost less than the value to provide the benefit. Reg. §1.61-21(b)

FMV of a benefit is reduced by any amount paid by or for the employee. For example, an employee has a taxable fringe benefit with a fair market value of $3.00 per day. If the employee pays $1.00 per day for the benefit, the taxable fringe benefit is $2.00 per day.

Special valuation rules apply for certain fringe benefits and will be covered in other chapters.

IRC Sections Excluding Fringe Benefits

The following Code sections provide a statutory basis for specific benefits. They are discussed later in the text.

•Amounts received as health reimbursements from employer§104 – •§106 – Health insurance premiums paid by employer •§117(d) - Qualified tuition reductions •§119 - Meals or lodging for employer's convenience •§125 - Cafeteria plans •§127 - Educational assistance program •§129 - Dependent care assistance program •– Specifies certain fringe benefits, ifnot covered by another Code section,§132 including:

 §132(b) - No additional-cost service  §132(c) - Qualified employee discounts  §132(d) - Working condition fringe  §132(e) - De minimis benefit    §132(f) - Qualified transportation expenses  §132(g) - Qualified moving expense reimbursements  §132(m) - Qualified retirement planning services  §132(n) – Qualified military baserealignment and closure fringe



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2 Reporting Fringe Benefits

In general, taxable fringe benefits are reported when received by the employee and are included in employee wages in the year the benefit is received. However, there are many special rules and elections for different benefits, discussed in this section. IRC 451(a); IRS Ann. 85-113, 1985-31

Employer’s Election of When To Withhold

The employer may elect to treat taxable fringe benefits as paid in a pay period, quarterly, semiannual, or annual basis, but no less frequently than annually. IRS Ann. 85-113, 1985-31

Alternative Rule for Income Tax Withholding

The employer may elect to add taxable fringe benefits to employee regular wages and withhold on the total, or may withhold on the benefit at the supplemental wage rate of 25%. Reg.§31.3402(g)-1; Reg.§3351.(a011T)- 

Special Accounting Period

Under a special rule, benefits provided in November and December, or a shorter period in the last 2 months of the year, may be treated as paid in the following year. Only the value of benefits actually provided during the last 2 months may be treated as paid in the subsequent year. You do not have to notify the IRS that you are using this special accounting rule. IRS Ann. 85-113

An employer may use this rule for some fringe benefits and not others. The special accounting period need not be the same for each fringe benefit. However, if an employer uses the special accounting period rule for a particular benefit, the rule must be used for all employees who receive the same fringe benefit.

Employer’s Election Not To Withhold Income Tax

An e may elect not to withholdincome taxeson the taxable use of an employer's vehicle that is includible in wages if: (1) the employer notifies the employee, and (2) the employer includes the benefit in the employee’s wages on the Form W-2 and withholds social security and Medicare tax. IRC )§1(4)3s2(0

Note:election is available for employer-provided vehicles only. In general, an employerThis does not have a choice whether to withhold on taxable fringe benefits.



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Accountable Plan

An accountable plan is an allowance or reimbursement policy (this does not have to be a written plan) under which amounts are nontaxable to the recipient if the following requirements are met:

• must be a business connection to the expenditure. There •  There must be adequate accounting by the recipient within a reasonable period of time. •  Excess reimbursements or advances must be returned within a reasonable period of time. IRC §62(c)

Business Connection

“Business connection” means that the expense must be a deductible business expense incurred in connection with services performed as an employee. If not reimbursed by the employer, the expense would be deductible by the employee on the employee’s 1040 income tax return as a business expense. Reg. §1.62-2(d)

Adequate Accounting

The employee must verify the date, time, place, amount, and business purpose of expenses. Receipts are required unless the reimbursement is made under a per diem plan. Reg. §1.62-2(e); Reg. §1.274-5T(b)(2)

Documentary Evidence

Employees generally should have documentary evidence, such as bills, receipts, canceled checks, or similar items to support their claimed expenses. This rule does not apply in the following circumstances:

1.Meal expenses that you reimburse on a per diem basis (discussed later), at a rate at or below the allowable maximum, under an accountable plan. 2.Individual expenditures (except for lodging) of less than $75. Lodging expenses always require receipts. 3.Expenditures for transportation expense for which a receipt is not readily available. Reg. §1.274-5T(c)(2)

Timely Return of Excess Reimbursements

The employee must return any excess reimbursement within a reasonable period of time. The determination of the length of a reasonable period of time will depend on the facts and circumstances. The rules in the next section provide “safe harbors” for meeting the test of timeliness. Reg. §1.62-2(g)(1)



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Safe Harbors for Substantiating Expenses and Excess Reimbursements

If an employer uses either of the following methods, the requirements of timely substantiation and return of excess advances/reimbursements will be considered met. Reg. §1.62-2(g)

Fixed Date Method

If the fixed date method is elected, the following conditions must be met:

•30 days of when an expense is paid or incurred, andThe advance is made within •60 days after it is paid or incurred, andThe expense is substantiated within •Any excess amount is returned to the employer within 120 days after the expense is paid or incurred. Reg. §1.62-2(g)(2)(i)

Note:The maximum number of days for advance is 150 (up to 30 days in advance plus 120 days maximum for settlement).

Periodic Statement Method

Under this method, substantiation and return of excess must be made within 120 days after the employer provides employee with a periodic statement (at least quarterly) stating that any excess amounts are required to be returned. Reg. §1.62-2(g)(2)(ii)

Note:The maximum number of days for advance is 210 (90 days for the calendar quarter plus 120 days maximum for settlement).

Other Reasonable Method

If an arrangement does not meet one of the safe-harbor methods, it may still be considered timely, if it is reasonable based on the facts and circumstances. Reg. §1.62-2(g)(1)

Example:An employee on an extended travel assignment might have a longer period to substantiate expenses and return any excess allowance than an employee on a brief overnight trip.

Other Rules for Employer Accountable Plan

Employers may have multiple expense allowance policies and may have both accountable and nonaccountable plans for different types of reimbursements. Employers may establish more restrictive conditions for the plan than imposed by the accountable plan requirements. Employees cannot compel the employer to establish a plan. Reg. §1.62-2(j)



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Nonaccountable Plan

A nonaccountable plan is an allowance or reimbursement program that does not meet all three requirements for an accountable plan. Payments made under anonaccountableplan are taxable wages subject to all withholding when paid or when constructively received by an employee. The employees may be able to deduct these expenses as itemized deductions on their individual tax returns.R eg. §1.62-2(c)(3)

Travel Advances

To prevent a financial hardship to employees who will be traveling away from home on business, employers will often provide advance payments to cover the costs incurred while traveling. There must be a reasonable timing relationship from when the advance is given to the employee, when the travel occurs, and when it is substantiated. There must also be a relationship between the size of the advance and the estimated expenses to be incurred.

Accountable plan advances

Travel advances are not treated as wages and are not subject to income and employment taxes when they are paid under an accountable plan. The advances must be for travel expenses related to the business of the employer, substantiated by the employee, and any excess returned in a reasonable period of time. Reg. §1.62-2(c)(4)

If an employee does not substantiate expenses or return excess advances timely, the advance is includible in wages and subject to income and employment taxes no later than the first payroll period following the end of the reasonable period. Reg. §1.62-2(h)(2)

Nonaccountable plan advances

Advances from nonaccountable plans to the employee are subject to withholding when the advances or reimbursements are made to the employee. Reg. §1.62-2(h)(4)(ii)

When advances are included in income

Advances become taxable, to the extent they are not substantiated by the employee, no later than the first payroll period following the end of the reasonable period. A reasonable period may end in the year after the advance was made. After the end of the calendar year, any amounts previously reported in wages cannot be reversed, unless the amount was erroneously treated as wages at the time of inclusion. Reg. §1.62-2(h)(2)

Example:A small state agency pays a monthly mileage allowance of $200 to certain

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